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'Why China, we are not afraid of any competition'

April 21, 2010 11:54 IST

B Prasada RaoPrivate power equipment providers have been complaining that they are losing out to cheaper competition from Chinese manufacturers.

But B Prasada Rao, chairman and managing director of state-owned Bharat Heavy Electricals Ltd, tells Kanika Datta it's possible to counter the problem with better-performing products.

Last financial year, the Rs 34,050-crore (Rs 340.5-billion) engineering giant proved it could do so by bagging large private sector orders. Edited excerpts:

You have said you are not all that worried about competition from China. Why is this?

Ultimately, competition is competition, but it is also true that with China, we are not on a level playing field. There are two things when it comes to competition from China.

One is that they have the advantage of their own state subsidies, the other is that our government must ensure that our domestic taxes and import duties do not favour foreign players over domestic players -- and please note the words foreign players, not just Chinese.

The argument from BHEL's side has always been that we will demonstrate our competitiveness if you give us a level playing field.

In fact, we have been demonstrating our competitiveness since the late seventies when international competitive bidding was introduced, even before the entire economy was liberalised in the nineties.

But till the mid-nineties, BHEL enjoyed a 10 per cent purchase price preference.

The power sector never implemented that policy.

Second, BHEL never took advantage of that policy. In any case, the purchase preference was not applicable to ICBs and BHEL proved its competitiveness by winning 90 per cent of the bids in which it participated. So our competitiveness has been proven beyond doubt.

To come back to your first point about a level playing field, in what way are you disadvantaged?

For example, in our mega power policy, we have a zero per cent Customs duty on imported equipment, which gives foreign players an advantage in this country.

Whereas if you go to their countries, there is an import duty.

China, for example, has a 30 per cent import duty and some segments are completely closed. In the below 300- Mw segment, foreigners are banned, whereas we are open.

There are other disadvantages for domestic players because foreign players don't have to pay local taxes.

The Indian player, on the other hand, has to pay a number of imposts such as road taxes, octroi, sales tax, entry tax, some states even have a city tax.

Different states have different processes, so all these things add to the costs.

Also, feedback from various technology providers like Alstom and so on shows that Chinese manufacturers are using technology (such as super critical thermal sets) from OEMs for equipment being supplied in India, which is not allowed under the license agreement and violates intellectual property rights.

Coupled with that, we have several other country-specific disadvantages related to financing.

We pay higher interest rate for working capital we raise from the market. If you look at the developed economies or even China, you will find their financing costs are not as high as ours.

What's the interest rate differential?

The interest rate differential could vary between two and eight per cent. In fact, a CII study quantified the total disadvantage between 14 and 21 per cent.

This figure may have come down to 10 to 12 per cent due to sales tax reduction in some states.

Based on this, the Planning Commission has written to the government recommending the imposition of a safeguard duty to protect domestic manufacturers.

Second, new capacities are also coming up in the country.

BHEL has about 15,000 Mw and additional 10,000 Mw is coming up from L&T, Bharat Forge, JSW and so on, so there is a case to look at how these domestic capacities could be encouraged.

Even assuming the cost disadvantage has narrowed as you say, it is still quite significant, but you're not complaining.

Although we do take these issues with the government, at the same time we have to find a way to manage the competition - we can't only keep complaining about it.

So, internally, we have also drawn up a number of strategies to counter the competition and one of them is to introduce new ratings.

Our standard ratings are 250 Mw and 500 Mw; now we have introduced new rating setslike 600 Mw, matching the Chinese standard rating of 600 Mw.

They were competing against our 500 Mw set with their 600 Mw set and naturally at this higher rating, the cost per Mw comes down. With our 600 Mw set, we also improved efficiency.

The heat rate of our 600 Mw system is much better than Chinese heat rates -- so much so that the Chinese were able to offer that kind of heat rate only in their super-critical range.

And when we're able to give the same efficiency as super-critical systems at sub-critical costs, naturally we have the edge over them.

Similarly, we have even improved our 500 Mw set to 525 Mw, our 250 Mw set to 270 Mw, and in our lower range of 125 Mw, to 150 Mw.

These strategies have paid off and greatly improved our competitiveness. Coupled with that is the performance of our equipment -- the kind of operating ability, PLF and availability of spares and so on.

All these factors have effectively countered the Chinese competition for us.

Last year, about 90 per cent of our orders in the utilities segment came from private players -- and some of these players have earlier been going to the Chinese and have now come back to us.

At the end of the day, the proof of the pudding is in the eating. Performance, coupled with the service and ability to offer better equipment, has resulted in our ability to counter the competition effectively.

All of this must have entailed a lot of R&D.

Exactly. When we introduced the 600-Mw set, our R&D team at Hyderabad and our engineering groups both at the Haridwar and Trichy plants worked together to produce
a set with a better heat rate.

Did your R&D spends go up?

Our strategic plan document clearly stated that we were going to take our R&D expenditure to six times the 2007 levels by 2012.

In fact, we have done that by this year.

Last year, our R&D expense was nearly Rs 825 crore (Rs 8.25 billion), which is 2.3 per cent of our sales and, remember, our sales are growing by about 20 per cent every year.

We are probably one of the few companies in the country to spend this kind of money on R&D.

We also have a number of patents to our credit.

Last year, for instance, we applied for a patent or a copyright every day! 153 of our patents have already been granted and 300 to 400 patent applications are pending.

Coupled with this, many operational improvement strategies were also introduced, such as design-to-cost, lean manufacturing and so on.

Of course, this has been a continuous process in the company but in the recent past we have increased focus on these activities.

What about service?

Power equipment is not something that you sell and then forget about.

It needs continuous sales and service. BHEL's service network and the kind of service support we give is one of the differentiating factors.

For instance, the Srisailam project in Andhra Pradesh was flooded for the second time in October and after one call from the chairman of the utility, we lined up our people in 24 hours.

They took over the entire renovation of that power station in record time.

In fact, we even provided parts for some of the units supplied by the Japanese.

Nathpa-Jhakri was another plant that suffered flood damage. In this case, none of the equipment was supplied by BHEL, it was entirely Japanese.

We also played a key role in the revival of the Dabhol plant together with NTPC.

In fact, we have reached the stage where customers feel comfortable with us. For example, at Santaldih, Chinese units are operating -- however, the next units are coming to BHEL.

The philosophy in Chinese equipment and BHEL equipment is totally different.

The Chinese have a standardised product that they sell, whereas BHEL engineers the product adapting to local conditions, such as the characteristics of the coal, the ambient temperatures, the seismic factors of the zone. Every job is tailor-made.

So, you are not scared of competition from China?

Why only China, any competition for that matter! We are competing against the Koreans and even the developed world. If you're afraid of competition, where will you be? You only have to gauge the competitor's strength and effectively counter it.

But the only thing we want is for the playing ground to be level.

Going forward, how will you build on your competitiveness?

Our investment in R&D is focused and it is going to increase. Since our sales are growing, our R&D spends are growing in absolute terms.

But we are doing the next strategic plan exercise this year and we'll look at increasing the percentage. How much?

We'll have to see. But we are already taking major cost initiatives in R&D such as the Integrated Gas Combined Cycle Project. We are also working on the Ultra Super Critical project that the government of India has initiated.

We are taking a lead role in this both for the boiler and the turbine. We are also setting up more centres of excellence at our corporate R&D facility.

Image: B Prasada Rao

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